I should begin by telling you that as I write this I have my browser open to the website of The Guardian because, quite literally, there are updates every few minutes on the exceedingly dynamic crisis between the Eurozone (EZ) and Greece. Throughout the day, as much as possible, I will add updates at the very bottom of this diary. Finally, I (aka Arliss Bunny) am the Finance News and Monetary Policy Burrow Chief for Netroots Radio and on The After Show I have covered the topic of Greece several times in recent weeks including here and here. I also went into great detail today regarding the developments of the past week. That podcast will be posted around 8PM EST today and I will add the link here when it is available. Will McLeod covers the political side of Greece on The After Showhere and here. Will combines both passion and knowledge so his podcasts are not to be missed.

Keep hopping for background and a play-by-play round-up of events which I have named, “As the Euro Turns.” It is an incredible story full of drama and suspense so join me. I do recommend taking a break right now to get a snack as it’s going to be a long read.

[Speaking of “snack,” I discovered this week that there is a World Carrot Museum. A CARROT museum…!!! BEST. THING. EVER.]

Background

It is easy to think of Greece as a small country and it is but as deflation rises and austerity continues throughout Europe, Greece finds that it is not as alone as one might imagine. Greece, Spain and Italy collectively have a population of 100 million which is one-third the population of the entire Eurozone. In Spain and Italy, in particular, upcoming elections are favoring the anti-austerity parties and current governments have not failed to notice. On 24 January, the day before the Greek elections, the leader of Podemos, the one year-old anti-austerity party now leading in the polls in Spain, made a speech that should have kept all the austerians in the EZ awake all that night and the next as well. The current government in Italy has also been signaling ever-closer sympathy for Greece. Even in Portugal, Ireland and France, where the governments remain pro-austerity, the people and opposition parties are increasingly eschewing austerity. Loudly.

If you have not been following the Greek crisis, here are some general statistics that will baptize you instantly into the “Wow! It’s hard to believe the EZ could be so wrong and STILL remain unwilling to drop austerity” club. Since the imposition by the Troika (the European Central Bank, aka the ECB, the International Monetary Fund, aka the IMF and the European Commission aka EC) of starvation austerity onto Greece, the Greek gross domestic product (GDP) has fallen by 25%, general unemployment has risen to 26% and youth unemployment has skyrocketed to 55%. Even more chilling, of the €254.4bn in loans from the Troika between 2010 and 2014, €29.3bn has gone into Greek operating needs and the Greek contribution to the EU stability mechanism while the other €225.1bn has gone to pay debt. So, of the loans made to Greece, only 12% has gone to the citizens of Greece. The rest has gone to pay German, Dutch and Austrian banks as well as the Troika. When you hear people talking about a Greek bailout they could not be more wrong. This is a bailout of the creditor banks, pure and simple and it means that German Prime Minister Angela Merkel has a €320bn gun to her headso how ever tough she wants to sound, Greek bankruptcy and Greek exit of the Euro (known as “Grexit) would splash her sticky, bloody brains all over Germany. Don’t imagine, whatever the rhetoric, that Merkel is unaware of the consequences.

On 25 January, by huge margins, the Greek people put a new party, SYRIZA (it’s an acronym) into power and while SYRIZA is called a “radical leftist” party they actually are not. They are a center, progressive party. What makes them seem “radical” to the northern Eurozone is that they have accepted and proclaimed the reality that austerity does not now and will not ever work…in Greece or anywhere else. Also widely misunderstood, SYRIZA does not want to leave the euro or the European Union (EU). They simply want the freedom to implement proven growth strategies (rather than disproven austerity) in order to reverse the destruction of their economy.

The new Prime Minister of Greece is Alexis Tsipras and I love this quote from him,
“(my party) is not a ‘threat to Europe’ but instead a force for change in its policy direction.” Tsipras and his Cabinet are planning to lead not only Greece but to blaze a path for other seriously jeopardized EZ member nations…and THAT is why the Germans fear him. Tsipras is, btw, a thoughtful, dynamic, strategic thinker and deserves an entire dKos diary dedicated to him and to the rise of SYRIZA. That will, however, not be a diary written by this rabbit as I am more of a monetary policy wonk than a political junkie.

The new Greek Finance Minister is Yanis Varoufakis. If I had my way I would confer sainthood on this guy right now. He is breathtaking in both his deep grasp of the real mechanisms of monetary and fiscal policy (he advocates the same positions as modern monetary theory) but the essential understanding that the core issue is not money, it is people. Varoufakis describes austerity as “fiscal waterboarding.” He repeatedly uses the term of art, “humanitarian crisis,” when he refers to the citizens of Greece. And he is not wrong. In keeping with Tsipras’ lead, of the EZ Varoufakis has said:

“If it is in my power to determine…Greece will neither want to leave the euro nor threaten to do so. We should not have entered the euro–that is crystal clear, but once in, it is disastrous to remove one’s-self from the Eurozone voluntarily.”

Because Varoufakis is so central to all that is happening right now I will add a bit more detail about him so that you can get a clear picture of who he is. First of all, immediately following the Greek elections, he started a whirlwind of meetings in EZ capitals with his counterparts. He never wears a suit or even a tie even when speaking at the House of Lords. It caused a flurry of glee in the British press when he showed up to meet with British Chancellor of the Exchequer, George Osborne wearing black jeans, an untucked shirt open at the collar and a leather jacket. The Guardian happily pronounced his attire “something Putin might wear on a bear hunt.” The Guardian further speculated that a suit would have conveyed “get comfortable I want to join the club” and that Varoufakis does NOT want to join. The Guardian surmised that Varoufakis wants them terrified and that this is the Greek way of signaling, “You can’t get blood from a f$&^ing stone so get real.” (This latter is my interpretation of their thought.) Varoufakis later said, in an interview with Stern, that he isn’t comfortable in suits or ties, he has never worn them and he isn’t about to start now.

Varofaukis is an economist (specializing in game theory) but he has been careful to say, in an oped piece he wrote that ran in the New York Timeson 16 February,

“If anything my game theory background convinced me that it would be pure folly to think of the current deliberations between Greece and our partners as a bargaining game to be won or lost via bluffs and tactical subterfuge.”

[If you want to keep apprised of the Greek crisis, do NOT read the New York Times. Seriously, their economics/business writers remain dedicated to their twin objectives to learn nothing about economics and to share that yawning stupidity with everyone. …You have been warned.]

He has both Greek and Australian citizenship and has taught in Athens and Australia but most recently was teaching at the University of Texas at Austin. All of this change is so recent that his wife is still in the States packing and making the arrangements to move back to Greece with their son. The Varoufakis family moved to Austin following a death treat made, via phone, to Varoufakis wherein the life of his son was threatened. Varoufakis had been involved in unearthing bank fraud and corruption prior to the threat.

Varoufakis runs a popular blog and intends to continue to do so though with shorter posts. He is also extremely active on Twitter (@yanisvaroufakis) and is a great follow.

Another new member of the Greek government is Deputy Minister of Labor and Social Solidarity, Rania Antonopoulos. Until her appointment Ms. Antonopoulos was a senior scholar at the Levy Institute of Bard Collage, one of the true homes of modern monetary theory (this is a different link than the last one). Antonopoulos has also been an advisor to the UN Development Program. One of Antonopoulos’ areas of expertise is job guarantee programs. The program she has designed for Greece over the past two years is the one that SYRIZA will be putting in place under her direction. The Levy Institute has been deeply involved with SRIZA over the past several years and its director, Dimitri Papadimitriou, has been flying to Greece every few months to lend advise.

Still hanging in there?…Perhaps a refreshing sip of carrot juice is called for. I’ll wait.

The core principle of the SYRIZA Plan is to put ordinary Greeks first. They mean to prioritize the 99% over the 1% and they have minced no words on that score. Among the ways they are planning to generate additional taxes is by clamping down on the off-shoring of income by the wealthy. They have a huge database already warmed up and they mean to use it. They are also going to break-up cartels and clamp down on criminal banks. And they aren’t just saying this, they are already preparing the first steps.

On 4 February Varoufakis officially announced that Greece is bankrupt. The conservatives of the EZ gasped and were SHOCKED, shocked I say! As Matt O’Brien, of The Washington Post, wrote on 18 February,

“The problem is the one thing Greece won’t compromise on is the one thing Europe won’t admit: that the bailout has failed, and needs to be scrapped.”

“There won’t be a meeting (on Friday) where we have to listen to how the world is working.”

In other words, while clamping his hands over his ears and loudly saying “lalalalalalala” he really means,

“There won’t be a meeting on Friday where we have to listen to reality and facts.”

I feel better already.

Many have seen the SYRIZA plan to refuse to accept further bailout loans as a sign that they will not only declare bankruptcy, as indeed they already have, but that they follow-up by defaulting and will exit the euro immediately. This is a misreading of their clearly and repeatedly stated intentions. Tsipras has said, to Bloomberg News among many others,

“Greece will repay its debts to the European Central Bank and the International Monetary Fund and reach a deal ‘soon’ with the euro-area nations that funded most of the country’s financial rescue.”

And,

“…it means that we need time to breathe and create our own medium-term recovery program…”

They remain strongly committed to their ECB and IMF loan obligations though, in carefully worded statements, Tsipras seems to be speaking less to the loans made by other nations and while this infuriates the creditor banks, when in bankruptcy having clear priorities is always wise. From the beginning SYRIZA has been fully transparent regarding its actions and intentions so stating their priorities out loud is an expression of their commitment to deal honestly. As far as debt goes, the breakout is as follows: €142n is owed to the EZ/IMF fund (these are speciality instruments raised only for the purpose of resolving various crisis), €53n to individual countries, €20n to the ECB in Greek government bonds and another €50b is owed by the Greek National Bank to other national central banks through the EZ payments system. If you are interested in knowing how Greece got into this situation in the first place and you guess international corporate terrorists Goldman Sachs you would be a long way to right. I did a podcast on that too and it is here.

Among the most astute commenters on Greece is Frances Coppola writing for Forbes and others. She is also an excellent Twitter follow at @Frances_Coppola. Here she is summing up the Greek position nicely,

“Greece has no intention of leaving the Euro or the EU (But others might force it out.)Greece has no intention of defaulting on its debts to primary official creditors. (But others might force it to.)

Greece is committed to pursuing policies that promote economic stability and recovery of Europe. (But others might not be.)”

While many/all believe that it is impossible for Greece to service their crushing debt load, there are some considerations that most fail to notice. (Again, hat tip to Frances Coppola for this analysis.) Greek debt already sits well below market rates and has a very long horizon for repayment. In fact, no principle payments are required on the European Financial Stability Facility bonds (EFSF bonds), mentioned above as speciality instruments, until 2022. Debt service for these primary creditors is 2.6% of GDP, so not entirely unaffordable. The current debt load is, however, 175% of GDP and some EZ idiot (achtung! pardon my sneeze) insisted that the 2012 agreement between the EU and Greece require that Greece reduce its debt load to 120% of GDP in three years! This already impossible task is made even moreso because as the Greek economy shrinks (it’s down 25%, remember) the debt to GDP load naturally floats up.

The real problem for Greece is not debt service but what is being called the “current program,” (aka “structural reforms”) the conditions Greece is required to fulfill in addition to repaying its debt. This is the tool the Troika used to impose “fiscal waterboarding”, to steal Varoufakis’ descriptor, on Greece. The “current program” includes the % of GDP requirement noted above and, even more damaging, the random edict that Greece must run a primary surplus (meaning not including interest payments) of 3% this year and 4.5% in 2016. I’ll say it again, that is the equivalent of a $720B surplus in the United States and it is insanity. In fact, it’s worse than that, it is built-in failure and everyone knows it. The 2012 agreement, to which the Germans are attached as firmly as a crustacean to a boat hull, was never intended to work. Oh, and the so-called Troika monitors, that the IMF and ECB are foisting upon the Greeks because the Troika are determined to treat Greece as a junior, less-than, not-quite-partner.

Which brings me to the Troika. The Troika’s position is that Greece is not in bankruptcy rather it is in a “temporary liquidity shortfall” and lending more money will allow it to meet debt service obligations while “structural reforms” will lead to renewed growth.In reality Greece is in a debt deflationary spiral (a condition when income is falling and debt is rising.) William Black, in an excellent post at New Economic Perspectives, notes,

“The troika overwhelmingly provides loans to Greece. The troika rages repeatedly about what it claims is Greece’s excessive debt. The troika is shocked that extending more debt (rather than aid) to a nation it claims is in disaster because of its excessive debt levels has not transformed Greece into a neoclassical paradise. The troika loans roll over existing Greek debt or bail out banks (and their owners and creditors). Many of those banks, owners, and creditors are foreign. The troika will make money on its loans to Greece unless the terms of those loans are renegotiated or Greece defaults on the loans. The horrific price to Greece of the troika’s loans is brutal austerity.”

Mario Draghi, President of the ECB, adds this useful tip,

“But for growth to pick up, you need investment. For investment, you need confidence. And for confidence, you need structural reforms.”

…and unicorns.

For confidence you need LOTS of unicorns.

In my book, I refer to this as the “Wussing, Wussie, Wusses – Business Confidence” problem. Folks, write this down on the inside of your eyelids; business never leads. Business follows. Business NEVER hires a single employee it does not desperately need at that very moment. Period. RABBITS have figured this out. You plant a carrot seed and when it sprouts we eat the top off. You plant another seed and we eat another sprout. It’s not a carrot until it’s a carrot, people.

And just in case my word isn’t enough, in Davos the infamous New York Times tracked down the even more infamous Kenneth Rogoff who said,

“Much bigger steps need to be taken to fiscally stimulate the hardest hit European countries,” Mr. Rogoff added. “Primarily,” he said, “steps should be taken to significantly lighten the government debt of these countries, with a view to giving space and freedom for governments to spend more.”

HOLY CRAP! Even Kenneth (I can’t manage an Excel spreadsheet) Rogoff gets it. How much more simple can it possibly be?!?!

And now on to Germany… (This would be a good time to take a drink. I’m recommending the Rombauer Chardonnay but that’s just me.)

Given its action in the EU, the German point of view is neocolonialist, at best, a new Reich, at worst. The current German surplus far exceeds even the upper limit for surplus as recommended by the ECB and this is important….

Because there is ALWAYS BALANCE German surplus = debt for others. Period. It’s accounting and we all know you don’t screw with the Math Gods.

German banks are up to their eyeballs in bubbles of the worst kind, right now, this very minute, all over Europe but particularly in Greece and Spain. If you remember nothing else in this endlessly long diary (and I have already said it once) remember this:

Greek loans are all about bailing out Germany.

Only 12% of the 2012 bailout monies went to Greek operations and the Greek people, the other 89% went to cover loans. In a classic example of NYT stupid they assert,

“While Greece sees itself as being punished by creditor’s demands, Germany and a host of European officials have argued that Greece and other troubled nations in the eurozone must clean up the high debts and deficits at the root of Europe’s crisis. They say Athens has failed to make enough progress on structural reforms seen as necessary to stabilize the economy, and they are pressing Greece to raise billions of euros through more budgetary cutbacks and taxes.”

Meaning TINA (there is no option to austerity). Back in the real world, austerity is the proven cause of the continuing Greek decline – not debt, not deficits. In fact, the deficits are too small. A significant fiscal stimulus is essential for Greece to move forward. SYRIZA understands this.

Meanwhile, from their lair under a volcano, top German politicians are demanding that Greece sell islands in order to bail out German creditors. Bwhahahaha.

“The history of Europe is long and blood-spattered. It is nothing like the United States, which is a young country with a common language, clear boundaries and a single political structure. Yes, the USA fought a civil war to achieve its current degree of political unity, and there are no doubt still stresses and strains. But Europe–if you must regard it as one entity, which is problematic in itself–has fought HUNDREDS of civil wars. We do not have a single language, we still cannot agree on where our boundaries should fall and national interest always trump “European” politics. You can’t overturn tribal and cultural identities that go back thousands of years at the stroke of a few politicians’ pens.”

“The Euro is the biggest threat to peace in Western Europe that I have seen in my lifetime.”

And Now…”As the EuroTurns”…

Monday, 2 February: Varoufakis begins his meetings with EU finance Ministers and makes news by wearing a leather jacket to meet UK chancellor of the Exchequer, George Osborne

Thursday, 5 February: Storm clouds began to rage in the EZ when SYRIZA kicked out the Troika monitors who had been deployed to watch over the shoulders of the Greek government dispensing discipline and austerity at will. SYRIZA had promised, during the election, to throw the monitors out and they did so. The ECB, in a tantrum rage and without required consultation, immediately “lifted the waiver” under which Greek government bonds had been allowed to trade. Prior to this the ECB had agreed to accept Greek government bonds even though Greece did not meet the ECB minimum requirements. A formal waiver was in place to allow the transactions and it was this waiver that was pulled by the ECB in a fit of pique.

Friday, 6 February: the ECB clarifies that Emergency Liquidity Assistance (ELA) funding will still be available to the Greeks but, of course, the strings on that money are many and short.

Saturday to Tuesday, 7 February to 10 February: more meetings, more speculation

Wednesday, 11 February: the first (emergency) meeting between the EZ Finance Ministers is held, in Brussels, and they get…nowhere

Thursday, 12 February: The ECB raises the Greek ELA allowance; Tsipras makes his debut in a meeting, also in Brussels, between EU Prime Ministers, and they get…nowhere

Saturday, 14 February: Varoufakis says that he believes Athens will reach agreement with the EU “even at the last minute.” and that many issues are agreed but privatizations & labor (meaning the SYRIZA promised minimum wage increase & pension repayments) remain the sticking points. Also, it is confirmed that exiting from the EZ does mean exiting from the EU and that the EU determines the “arrangements for a member state’s withdrawal.”

Sunday, 15 February: EC President Jean-Claude Juncker (of Luxembourg) announces that he has taken a “personal stake” in the negotiations and is making a “last-ditch” effort to resolve the differences. Tsipras and Varoufakis seem confident that they will come to agreement with EU finance ministers based upon the draft communique they have been given by European Commission’s Pierre Moscovici, called, cleverly, “the Moscovici Draft”. The Moscovici Draft contains no commitment to the “current program”, and instead refers to a “new arrangement”. The Greeks say they are “happy” to sign this “splendid” draft immediately. Moscovici calls upon EU finance ministers to be “logical and not ideological”. Ummm…fat chance.

Monday, 16 February: Fifteen minutes before the start of the meeting with the EU finance ministers, Varoufakis is handed a revised communique by Jeroen Dijsselbloem (the Dutch Finance Minister) and the language from the Moscovici Draft has disappeared and been replaced by the “current program” language which the Greeks remain unwilling to accept. All reference to “new arrangement” has been removed. The talks break down early in the day as Greeks are furious over the bait-and-switch. In the evening a third draft, the “second Moscovici communique” is released which combines elements of both previous drafts but retains the “current program” language. Both the second and third drafts essentially say,

“Give up your silly ideas of recovery so we can continue to pretend that everything is fine.”

Because things are not already screwed up enough, the third draft is translated, by the Eurogroup, to include “in line with” language but Greeks have been given a translation that means “along with”. Obviously, these are two completely different meanings.

Meanwhile, the following Very Serious People make the following statements:

Itallian Finance Minister Pier Carlo Padoan,

“ Greece leaving the EU is out of the question. I’m not worried. I am convinced that we will ultimately reach a common ground and a common decision.”

Here’s the part he didn’t say but everyone heard,

…because otherwise the Germans will be right back here again with my country after our elections.

Dijsselbloem equivocates,

“Within the program there is room to discuss.”

I call bulls*%!

Varoufakis leans in,

“In the history of the European Union nothing good has ever come out of ultimatum.”

Tsipras softens the line,

“We are ready and willing to do whatever it takes to reach an honorable agreement over the next two days.”

Tuesday, 17 February: Because Germans complained that they hadn’t, the Greeks release their own draft IN GREEK and it is mis-translated by the Financial Times. Chaos ensues. The Greeks also release all the documentation from the Monday meeting proving that the German claim that they had made no credible offer had been “economical with the truth.”

Greeks reiterate that they are willing to accept 70% of the “current program” requirements while a “bridge program loan extension” is put in place for a maximum of 6 months during which time a new agreement can be hammered out. As per the “current program” Greece is willing to: reduce bureaucracy (part of addressing EU corruption concerns), strengthen independence of tax administration, create a new efficient and fair system of tax litigation, modernize bankruptcy laws, reform the judicial system (another corruption issue), and dissolve cartels. BUT they make no offer to complete the other 30% of the current program – and that is one of Varoufakis’ “red lines.” In his oped in the NYT the previous day, Varoufakis had said,

“Faithful to the principle that I have no right to bluff, my answer is: the lines that we have presented as red will not be crossed. Otherwise they would not be truly red but merely a bluff.”

More from Very Serious People:

Austrian Chancellor Werner Faymann warns that ,

“Some policy makers have underestimated the risk of Greece leaving the currency union. It would have unforeseen consequences.”

British Chancellor of Exchequer, George Osborne, weighs in with,

“The consequence of not having an agreement would be very severe for economic and financial stability.”

Wednesday, 18 February: Per the recommendations of Tsipras, the Greek Parliament elects pro-European conservative, Prokopis Pavlopoulos to be the (largely ceremonial) President. This is a cross-party hat-tip and further unites the Greek people.

Greece announces plans to ask the EZ for a six-month bridge extension but not under the full “current program.” Greeks plan to propose a new bridging program to keep things going for six months and to pay €7bn in maturing bonds.

German Finance Minister Wolfgang Schäeuble proves he knows nothing about real world economics by saying,

“Greece would like to receive credit, but not fulfill the conditions to allow Greece to recover economically.”

He means austerity and he is…so…very…wrong.

Germans are publicly pressuring the ECB to deny further ELA funding to Greece believing the hard line will signal other anti-austerity movements that they had best not try it. Still, it is doubtful that ECB will cut-off ELA because it signals that ECB is not backing national banks and in such a sensitive environment this might cause other national banks to experience large cash outflows.

Ashoka Mody, former IMF official who helped design Ireland’s bailout, draws notice when she says,

“The ECB’s threats are completely empty. Despite all the bluster, it has no choice. The ECB has to ask itself how it can stabilize the financial system, not undermine it.”

Tsipras tells his Parliament,

“We will not succumb to psychological blackmail. We are not in a hurry and we will not compromise.”

And a new poll backs him up: 79% of Greeks support the government and 74% believe their strategy will succeed in the end.

Thursday, 19 February: Greece formally requests a six-month extension and, as a short-term compromise, they commit to maintain fiscal balance during renegotiation period, take immediate measures on tax evasion and corruption, agree to meet all financial obligations in the interim and to refrain from unilateral action that would undermine fiscal targets. In a HUGE concession, they agree, during the extension,to be monitored by the Troika again. They do not agree to a 3% budget surplus. They also stand firm on addressing their humanitarian crisis and their plan to kick-start growth with stimulus.

Germans reject the Greek proposal out of hand.

Economist Yves Smith has pointed out that while pundits predict that the Germans will “pull up at the brink” That’s what pundits said 101 years ago…right before World War I. That gives me paws…opps!, I mean pause. (I already have paws. Silly rabbit.)

BUT German Economy Minister, Sigmar Gabriel, comes out with the statement that, “we can’t shut the door on Greece.”

Truly interesting is the the comment made by Varoufakis in an interview with Stern (this whole interview is a spectacular read),

“Angela Merkel is by far the most astute politician in Europe. There is no doubt about it. And Wolfgang Schäuble, her Finance Minister, is perhaps the only European politician with intellectual substance. He’s a genuinely committed European and a deep down federalist.”

Proving that he is genuine when he speaks of valuing the dialectic. (This is a long read but incredibly thought provoking.)

Friday, 20 February – Today: EU Finance Ministers to meet and decide to offer Greece a four month extension in which to negotiate but they slap down all Greek demands and insist that Greece color inside the lines of the “current program.”

German Finance Minister, evil #$%hole that he is (“intellectual” or not), is caught smirking while saying,

“Being in government is a date with reality, and reality is often not as nice as a dream.”

(Don’t worry, there’s an extra hot corner of hell waiting for this guy.) In the meantime, it is worth knowing that the current Board mix of the ECB is very anti-Greek but the Board rotates and the composition of the March Board is much more likely to be easier for the Greeks to work with. …and now they have four months to catch their breath, make a plan and get it done.

And before I head back down the rabbit hole for the night, a couple more quotes that are helping to keep me from screaming at my laptop about all of this:

Having just returned from NN14 I have confirmed something I always knew down deep in my heart. If you want to watch the life go out of the eyes of all but a handful of very wonky progressives you say two simple words, “monetary policy”. I would be standing in a clump of progressive activists and someone would ask, “So, what do you do?” I would respond, “I write on monetary policy.” People would step away. Getting another cookie in the Netroots lounge would suddenly become an urgent priority. As they were fading into the sunset I would say, “but I try to be accessible and funny!” No matter. They were long gone.

There you have it, the problem in a nutshell. Changing the understanding of monetary policy could do more to make the progressive social and environmental agenda possible than anything else but it remains the ugly stepchild. Maybe it is because we, as liberals, are so immersed in the philosophy that money isn’t what is important in our lives. Maybe it is that we think it will be too hard to understand (it’s not) or impossible to change (it’s not). Regardless, we have never developed a vocabulary for talking about it and we generally don’t have the underpinnings of a foundation to understand it. Until we get there we will be stuck allowing the ultra-conservative right and big business define the economy in ways that best suit them no matter how destructive and inaccurate.

Of course the thing about change is that it takes work and effort. Here are the small things I am doing as a start and if any of you are also working in this area I would love to connect to you if I have not already done so.

First of all, I am working on a series of books that are short, accessible, possibly funny, and illustrated covering both the most basic elements of monetary policy and how our government spends money. [I am not covering what we spend money on (fiscal policy) as that is its own huge litterbox of a mess. I am covering the process of spending so that we can each best figure out where we can generate pressure.] My first short e-book can be found on Amazon, “The Smart Bunny’s Guide to Debt, Deficit and Austerity.” The second, “The Smart Bunny’s Guide to Government Spending” will be out near the end of September followed closely by the page-turner, “The Smart Bunny’s Guide to the Federal Reserve”. After those I will take a break and then move on to banking reform and then the IMF and the World Bank (because who wouldn’t want to spend their late nights researching the IMF?)

In the meantime I will be joining Justice Putnam on Netroots Radio “The After Show” every Thursday starting at 11:30AM EDT this Thursday, 31 July. I’ll take about fifteen minutes to cover one bite-sized morsel of information so that those who follow “The After Show” will develop a vocabulary and understanding over time. [In case you don’t know, “The After Show” streams live on Netroots Radio and is also available in podcast on Stitcher and iTunes.]

In case you are both interested in monetary policy and ready to wade in, I recommend the amazing website: New Economic Perspectives. It is run by the incredible Dr. Stephanie Kelton, Associate Professor of Economics at the University of Missouri-Kansas City, Research Scholar at The Levy Economics Institute and Director of Graduate Student Research at the Center for Full Employment and Price Stability. [Take a second to imagine her business card.] For those of you who met Dr. Kelton at NN14 you know she is on fire on this subject and her ability to describe the real world of monetary policy to the uninitiated is surpassed by no one.

Anyway, we all do what we can. Stephanie and her associates do what they can, I do what I can. Together, we can do more.

Carrots!

Share this: Arliss pontificates on politics & life with a litterbox. Thump!

Over the past couple of weeks the debate around platinum coin seigniorage (PCS) has been raging and that is good. In fact, it is great. Like carrot subsidies, PCS is something we should have been talking about years ago. As a rabbit American, I support both but like LetsGetItDone (LGID) who has been writing incredibly knowledgable and quite brillent posts on PCS at both The Daily Kos and the New Economic Perspectives sites, I am hoping it will be possible to leverage the current discussion into a much larger one about crating policy space.

The Power of Paper

It’s like that tired adage, give a rabbit a carrot and he eats for a day, teach a rabbit to order carrots on-line and he eats for a lifetime – or something like that. Sure, we could solve the current debt ceiling problem by minting a $1T coin but we could also chose to do more. We could resolve the entire US debt and return our economy to full employment by minting a $60T coin.

Oh, put a sock in it each and every one of you who is sputtering something about insanity. First of all, there are some outstanding detailed explanations as to why this really will work but it all comes down to one simple thing – a fiat currency really IS a figment of our collective imagination. It IS just little pieces of paper or metal upon which we have collectively agreed to confer value and in which value is retained, in the case of the United States, by the policies of the Department of the Treasury, the Internal Revenue Service and the Federal Reserve. Beyond that, money is just paper. (Though, I have to say that in comparison to other paper, when one just happens to nibble on money, humans have a way of turning an extra special shade of white.)

Given that we know that fiat currency works, one of the things that is the most interesting about this entire debate is that no one in Congress

…or the White House

…or the Treasury

…or the Fed

has figured this whole thing out before. Part of this is because, as I have said, almost all of the people currently staffing those positions learned monetary policy at a time when the thinking was all still founded on the gold standard despite the fact that the monetary system no longer has these limits. Nixon took the country out of Bretton Woods in order to allow for growth but only a very few people managed to realize that national policy makers also needed to alter the way they thought about actual money. They needed to smash their old thinking so that the truth of the reality could become clear.

Yeah, like that happens.

I was just reading today about some complete idiot (and by “idiot” I mean conservative Republican) who is claiming that teachers teaching the distributive principle in algebra are pushing a liberal agenda. Back up the truck full of stupid. I get that once humans have their minds set on something it is hard for them to see anything else or in any other way but that won’t work for the US economy unless, of course, your objective is aligned with the GOP and your intention is to destroy the economy on “principle.” Let’s assume that since you are reading this, you are not satisfied with crashing and burning the economy and that you are willing to learn something new. Ok, now take what you think you know about debt and inflation outside and smash it against the rocks of “that’s SO ’70’s.” I can wait. (Don’t forget your jacket. It’s a bit nippy outside.)

If you still think the old “rules” of debt and inflation apply, it’s about to get a little nippy in here. Bunny teeth are sharp. I’m just sayin’.

Policy Space

For those of you who are beginning to understand the incredible power of a strong fiat currency we can now move on to what I really wanted to talk about, policy space. In speaking about policy space I am talking not about the legality of PCS and I am not talking about PCS in relationship to the debt ceiling. I am talking about why we, as progressives, should be supporting PCS for all we are worth. Progressives should be loudly supporting PCS with one voice because it would allow us, as a nation, to get past all the truly meaningless battles being fought in Washington, over shadows that live only in the backs of paranoid minds, and on to policy that could genuinely and positively effect the real world.

Let’s imagine, for instance, that we are talking about minting $60T worth of PCS coins. It could be any number but $60T is one being actively talked about so I’ll go with that for the sake of this example. (And remember, I’m not going to get into why there is no realistic way this would cause inflation or any of the other topics that have been covered by myself and LGIT as noted above.) Now, the funds made available by PCS are not pushed out immediately into the economy, as so many imagine (that really would cause inflation), rather, they are sitting in a Treasury account at the Fed. In other words, for all you MMT folk, they are a $60T entry on a spreadsheet. The first thing that happens, of course, is that all debt that falls due is paid as it is due, in full, instead of being rolled over. No more interest is paid and no new debt is created. Take that, austerians, as Paul Krugman calls those dedicated to austerity. Our debt is being retired. Done. Fin. At the same time, Congress is still in session and is suddenly in a position to authorize spending without having to deal with the canard of not having enough money. (Which, as MMTers know is NEVER the case for the US government but that is not for this blog post.) The issue would be that if we were able to mint the big coin the optics and political will around everything else changes.

As Paul Krugman cites in his 2012 book, End This Depression Now!,

And early this year, with the debate having shifted perceptibly toward a renewed focus on jobs, Republicans were on the defensive. As a result, the Obama administration was able to get a significant fraction of what it wanted…without making any major concessions.

So the first thing Congress now has is a free hand, policy space, to deal with unemployment. In point of fact, the take-over of the national zeitgeist by drummed-up concerns over debt and deficit (see a brief discussion on why FAUX News and company are so dedicated to this mantra near the end of this post) has been allowed to relegate unemployment to the backseat. Putting unemployment in the backseat in order to talk about imaginary problems denies the absolute fact that unemployment is still driving the car. So, if you are wondering why the US economy is still swerving all over the damn road, that’s the reason right there. Platinum coin seigniorage would put unemployment right back in the front seat and, in a matter of a very short time, could put everyone who wants a full-time job back to work. (The resting rate for unemployment is said to be around 3.5% so don’t ever think we are looking for Gadot/zero.)

That should be reason enough for progressives to be the biggest cheerleaders of PCS – but wait, there’s more.

Strict and seriously enforced environmental regulation could be enacted and, instead of using indirect reward like tax breaks which tie up liquidity for tiny and giant corporations alike, the government could provide upgrade grants. Jobs are created and, I love this part, everyone benefits except the bankers. Also, this would move corporations from opposing such regulation to supporting it. Imagine, all you environmentalists out there, being on the same side of an argument as American Electric Power. We still would have problems with them (“Clean Coal” anyone?), I know that, but we could move with them further down a road which would benefit all of us collectively. For small corporations, it would make it possible for them to come in to compliance with regulations which they are commonly exempt from because, if included, they would not have been able to comply.

It would allow this nation to address long-standing infrastructure crisis’ including the electrical grid, water treatment and transportation. Even major improvements to existing systems, like rail, would benefit the economy and each one of us enormously.

We could not only invest in disaster preparedness, we would have the ability to set aside funds to deal with the coming, rapidly increasing, rate of disasters including things like the fires in the West, draught in the Midwest and that’s before I even get to superstorms and hurricanes. Of course, I am already assuming that should funds be perceived as being available, the needs of the states and victims hit by Sandy would be addressed.

And on and on and on – in a manner metered by Congress and the Fed up to the point where industrial utilization is near peak levels and unemployment is down near 3.5%.

Perceived Funds

The reality is that the coin is not a necessity. All that it does is give physicality to an accounting transaction. Large PCS would make it plain to all that the US government will not and cannot run out of money. There are constraints on our economy (inflation and the exchange rate) but “having enough money” is not one of them. The ability to spend whatever we need to bring the economy into balance has been available to the government since 1971, since the day the US dollar became a fiat currency, we just haven’t realized it and haven’t used it.

What progressives need to know is that the things we want, the things we have been calling out for from the wilderness, become possible with Large PCS. Also, if by some minute chance we were able to get this President to order large PCS then we could all wipe trickle-down economics off the bottoms of our kicks on the nearest patch of grass. If for that and no other reason, we should all be getting behind this right now.

So, Why Do We Think Debt is a Big Deal?

Debt, given the current state of our economy, means nothing, so why do we, the progressives, the reality-based group, the group that actually thinks math is a real thing, believe it when we hear it? Well, folks, you have been duped and, no surprise here, you have been duped by FAUX News and company. I know, you don’t listen to FOX but you do listen to people who listen to them and all those people drank the Kool-aid. Rabbits are big on water. We oppose Kool-aid on principle. (This would probably not be the case if the orange flavor was carrot instead of orange.) Rabbits, like all prey animals, are adamantly focused on the real world so we were not taken in.

Still, one has to ask, why this meme is so important to conservatives?

Simple. Greed. Surprised? Of course not. In the dictionary under “conservative” the definition says “greedy bastards.” We all know that. So, how does their greed tie in here, you ask? Well, to start with, Pete Peterson knows. If we cut social security for reasons of austerity, where do those people go? They go right to Wall Street. If we cut Medicare, where do those people turn? They turn to the insurance industry. If anyone other than the government is funding projects where is that money coming from? Why, it is coming from the banking industry, of course. So, here is the equation:

Wall Street + Insurance Companies + Banks = Non-stop Debt Crisis Meme

That’s it. That simple. This other equation,

Platinum Coin Seigniorage = Policy Space

has been here through this entire crisis and has had nary a whisper until #MintTheCoin took off just a couple of short weeks ago and we, as progressives, absolutely must get on board. If you ever, in your entire life, wanted to be a part of making a real change that could change everything for the better, this is it. Platinum coin seigniorage isn’t the golden ticket but it’s pretty damn close. Thump!

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Memes are a strange thing. One never can really predict what will catch on and what will die with a mingy wimper. Still, economist Stephanie Kelton has to be pretty thrilled that #MintTheCoin has gained traction. She, and the entire rest of the Modern Monetary Theory (MMT) community of economists, have certainly been waiting long enough. #MintTheCoin is Dr. Kelton’s (@deficitowl) current contribution to Twitter and it’s an important one but I’ll bet you don’t know why.

Hint: the answer isn’t “debt ceiling.”

The meme has caught fire and is being promoted by the likes of both Paul Krugman and Salon (…’nuff said) as a solution to the debt ceiling via the hastily lashed together vehicles of the 14th Amendment to the US Constitution and Title 31 of the United States Code Subtitle IV, Chapter 51, Subchapter II, Section 5112. I am not going to repeat the basics of the meme because they are splashed all over the web. If you have been dead for the last couple of weeks and somehow missed them you can catch up here, here, and here. There is also, of course, the idiotic GOP response codified, for the moment, in the bill being introduced by Congressman Greg Walden (R-OR) to prevent the President and Secretary of the Treasury from taking the option of the now infamous platinum coin. My favorite part of this legislation is that it tacitly acknowledges that the Secretary of the Treasury really does have the right to mint the coin making any argument to the contrary just that much more difficult. Derp. The part of this legislation that makes me want to put my face through glass is when the Congressman drops his pail down into the my-small-business-can’t-print-money-well to which I respond,

Listen up, Dimwit, the US Federal Government is NOT a business or family and it CAN and SHOULD print money.

Now, I’ll grant you that the world is a big place and some of you thought you had better things to do than to read my post on Modern Monetary Theory vs the Fiscal Cliff (this link is to the Daily Kos cross-post because the discussion thread was excellent there) but if you do not understand the statement above, stop now and read the older post. I’m not kidding. Stop. Now. Thump!

For everyone who did not stop I am going to go forward with the assumption that you fully understand the following things:

The budget of the Federal government is in no way, shape or form like that of your family or of any businessand likening the Federal budget to the budget of a small business is the same as likening kittens to helicopters. (Ok, both look pretty funny when they are flying through the air but other than that….)

The Federal government is not balancing a budget, it is balancing an economyand the delimiters of that balance are unemployment, exchange rates and inflation. Period. End of story.

Deficits mean NOTHING. Debt means very, VERY little.

The US economy has nothing what-so-ever in common with any country which uses the Euro so comparisons to Spain or Greece or Italy are, again, kittens to helicopters.

Again, if there are any of the above which are unclear to you, go back to the older post. I mean it. *glare*

What has to be thrilling the MMT community to the tips of their pointy little heads is the fact that the platinum coin is breaking into consciousness at all because they have been talking about it for a long time for a whole different reason.

Zeroing Out the US Debt

News Flash: the platinum coin could be used to zero out the entire US debt held by the Fed. Done. Gone. I’m going to nibble on some hay while you think about that. … … … … … … Done? I didn’t think so but no one has ever credited me with patience.

There are, of course, two things to know about this approach and the most important is that it is totally unnecessary because given the current (stronger than you realize) position of the US economy and the fact that we have a fiat currency, debt actually means very, VERY little. It is, essentially, a matter of an internal balance sheet adjustment and if someone wants to make a pretty little coin or two or fifty to make it more real, well isn’t that just precious. What this would do instead is allow the funds which are being spent in service of our current debt to be pumped back into the private sector, in a controlled fashion, until we have reached full employment, at which point the spigot would be reduced to a normal flow.

What’s that? I can hear the anguished screams all the way from here. No, inflation is not a factor. Inflation is caused when demand exceeds supply and our economy is no where close to that margin. There is huge room for growth and capacity utilization rates remain exceedingly low. There, there. *pat, pat* I know. It’s a shock because those GOP bullies have been pushing the Debt-bad/Inflation-nigh meme for so long and you actually had started to believe it. If you need more solace on this issue, go to Bill Mitchell’s Billy Blog, for an excellent explanation.

Snipe Hunting

The real truth is that debt isn’t bad. At least, not at our current levels and in our current financial position. Still, we have listened to the GOP and the Tea-baggers rail on it for so long that it is as if we, as a nation, have been on a snipe hunt and we actually believe there are real snipes out there. Let me do you this favor and smack you upside the head, *SMACK!* Wake up!!!

There are not now and there never were actual snipes and because it does not serve our nation and economy for the private sector (all US individuals and businesses) to be in the red and because we will absolutely have a trade deficit for the foreseeable future (which is the international sector), the laws of accounting (if confused, refer to both my previous post on MMT and my previous *glare*) say that the public sector (the Federal budget) MUST be running a deficit . If we just can’t make ourselves comfortable with that than let’s pretend otherwise by zeroing out the debt with a magical coin. Here’s the bottom line. The debt means NOTHING and the coin means NOTHING and using them to cancel each other out so that we feel better is silly but not necessarily a bad thing. Plus, of course, it frees up all the money necessary to get everyone who wants to work back to work… oh, and to invest in the changes necessary to address climate change, invest in education, rebuild our national infrastructure, solve the long-term healthcare crisis…among a few other little things.

The IMF’s Giant Facepalm

…and then there’s the International Monetary Fund (IMF.) These genius’ have been at the head of the austerity bandwagon for years as they have dutifully strong-armed (and worse) economy after economy into the ground with their iron-clad commitment to austerity. …except they were wrong. Totally and completely, absolutely and irrevocably (in some cases) wrong. Now, it’s one thing for me to say this. What is one rabbit against the all-powerful genius of the IMF? So I had to laugh (and cry a little) when they finally acknowledged that they have been wrong all along. As it turns out, when an economy is struggling and it implements austerity, things get worse. Conversely, when countries, like Germany, Austria and the US (thank you, President Obama), use stimulus, they experience improvement. Why? Because (and here I apologize for repeating myself) a country is not balancing a budget, it is balancing an economy. WHO CARES what a ledger says! What matters is that people are working, the temperature of inflation is cold and the exchange rate is reasonable. Those are the only three things that matter. Everything else is just a snipe no matter what the Tea Party or the GOP or the IMF has to say.

In Closing

The Giant Platinum Coin IS an interesting concept. It IS worth thinking about but it is wasted on an imaginary “problem” like the debt ceiling. Oh, it’s not that it can’t or shouldn’t be used there. It’s just that if we really want to get the GOP to shut the thump up and we really want to change the future of our country and the lives of our citizens, we won’t just stop there. But that is, of course, just one rabbit’s opinion.

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I am writing an educational post today which will attempt to describe, in the simplest terms possible, Modern Monetary Theory (MMT) and its place in the current national conversation. I fully accept that rational thought will play absolutely no part in whatever agreement is ultimately reached in Washington, DC so that is not really at issue. This post will be neither political nor funny. I also feel obligated to provide this disclaimer. I am a member of the one percent. As a rabbit American of means, I live an exceedingly comfortable lifestyle which is seen to by my large staff. I have significant investments, including substantial holdings in carrot, kale and blueberry futures. Honestly, I couldn’t care less about the fiscal cliff because my every whim will be met regardless. I sense however, that not all of you are in a similar position. I know my staff thinks they have cause for concern. In terms of what lawmakers may decide to do, my staff is right. In terms of economics, they really are wrong. Allow me to explain.

In making my most critical, essential and earth-shattering point, I will try to be as subtle as I can.

The Federal deficit is not big ENOUGH.

There. I said it. Go back and read it again just in case you missed the emphatic nature of this statement. Got it? Oh, I see, not really. I suspected as much. Allow me to explain and to provide links to more experts on this subject than you will ever have time to read but really, really should because it is fascinating stuff. It is also important that I note here that MMT is politically neutral. It is not a proposal for fiscal policy. MMT is a description of the current monetary structure as it has been ever since the US went off the gold standard. That it is not widely understood is an understatement.

I attended the University at All-Bunny (SBUNY) and when I took macroeconomics the words “modern monetary theory” never crossed the lips of any of my professors. Later, as a grad bunny, I attended some evening lectures during which MMT was introduced but the theory was young and had not fully coalesced. I say this not because I think you care about where I first heard about MMT but because there is a reason you probably don’t know anything about it either. Either you, like me, matriculated prior to the advent of MMT or your professors, like virtually all those in the country, were not exposed to MMT during their training so they did not pass it on to you. Either way, MMT is only beginning to enter the general knowledge-base because it simply takes a while for new information to gain a footing especially in an area as staid as economics. Still, given the potentially society-changing negotiations going on in Washington right now, this seems a reasonable time to point out that no matter what they decide, they are likely to be wrong because, as anyone who has paid informed attention to the monetary crisis in Europe knows, austerity measures are a death knell for already stressed economies. Nation states that are locked into a fixed currency, like all those who participate in the Euro, have turned over the control of their economies to forces which have no interest in acting in the best interest of each individual country. But, and this is important, the United States is NOT in this position.

Fiat Currency

Once upon a time the US was the prime signatory to the Bretton Woods Monetary System wherein forty-four allied nations agreed to tie their currencies to the US dollar at a fixed rate. The US dollar was tied to gold. This acted, for a time, to stabilize world currency markets and pushed then much needed security throughout the system. Eventually though, because gold is a limited commodity, being tied to the gold standard began to seriously impinge upon the US economy so, in 1971 President Nixon, with the so-called “Nixon Shock”, took the US out of Bretton Woods and off the gold standard. This was a huge deal, bigger even than I can describe. The United States now had a pure, fiat currency (meaning that the currency does not, in itself, have intrinsic value) and that the US, as the issuer of said currency, had new and significantly increased power to make much broader discretionary decisions in terms of economic policy. But a funny thing happened. US monetary policy makers didn’t really do much with their new found freedom.

To begin to explain this I must first make something very, Very, VERY clear – a US federal budget is nothing what-so-ever like your personal household or business budget in any way, shape or form. It’s not. See – you aren’t getting this.

It…is…not…like…your…family…budget.

Period. Do you see why? You don’t do you. *sad face* Well, you are in good company. Most of the country and, to the best of my knowledge, every single member of the House of Representatives, is right there with you. Here’s a hint. You have to work for your money. A business has to produce goods, or services, or, if it is Bain Capital a vulture capital firm, steal money in order to have any. The US government is an issuer of currency. They don’t have to earn it. They print it. (Do NOT go to the “inflation” place yet. I’ll get there later.) Let’s just stay focused on the simple fact that the big difference between the US government and you or me is that they will never run out of the currency needed to cover their debts. (I KNOW. I’ll get to the inflation thing later. Stay focused.)

One of the most interesting things about fiat currency is that taxes are not actually a requirement. Neither is there a need to sell bonds or borrow currency. Do you know what happens when you pay your bill to the IRS in cash? They shred it. No joke. They make a note in their computers next to your account and then that cash is gone. Poof. The only real purpose of taxes is to drive value into the economy (see Sectors, below). Taxes are a way to move value back from the private sector into the public sector. Deficits are the opposite. Deficits are a way to leave value in the private sector. For example:

if the Department of Defense spends $100 buying a wrench than the private company that sold it to them, let’s call this company Schmoing, gets that $100. The value has transferred from the public into the private sector. If Schmoing than turns around and pays their wrench supplier, ACE Hardware, $15 for the wrench, $15 of the value transferrs to ACE and $85 stays with Schmoing. If ACE than turns around and pays the actual maker of the wrench, a firm in China called Wrenches!, $5 for the wrench than $5 of the original $100 has now moved outside of the US economy. When tax time rolls around, Schmoing and ACE both pay taxes against the profit they made on the sale of the wrench. ACE pays $1 and …now here you know this is just imaginary because in the real world Schmoing would pay nothing…but back to the story, Schmoing pays $9. So, of the original $100, the government received $10 back in taxes and $5 went out internationally (to China) leaving an $85 federal deficit but that money didn’t evaporate. It is still here, in our economy, in the private sector, which is where we all agree we want to keep the majority of the assets of the country.

Sectors

Just as math is math, accounting is accounting. There must be balance in the balance sheet. Understanding that the balance is more macro than we commonly think is why it is so difficult for us to accept that a federal deficit is a good thing. The federal government isn’t balancing a federal budget – they are balancing an economy. These are very different things. If they were balancing a budget, like certain legislators keep insisting is a necessity, than the worry would be that income (taxes) and outgo (government spending) are balanced. This is way,WAY TOO SMALL A VIEW and it’s wrong.

Our economy is divided into three sectors and it is these sectors which need to be in balance. The three sectors are the private sector (individuals and business), the public sector (local, state and federal governments) and the non-domestic sector (foreign individuals and businesses, domestic monies which get moved into foreign tax shelters, and foreign governments). As always in accounting, one sector’s asset is another sector’s liability. This is seen in the example given above when the $90 liability of the public sector becomes the $85 asset of the private sector and the $5 asset of the non-domestic sector. MMT has, therefore, two rules: all sectors cannot be in surplus at the same time and all sectors cannot be in deficit at the same time. Accounting has these same rules. This is nothing new.

As we all know all too well, the private sector cannot last for long in deficit without the economic consequence of recession becoming apparent. Likewise, at least in the US economy, we are not going to be without a trade deficit any time soon. I’m pausing here so you can all stop on the tracks and pay attention to the gigantic epiphany train that is about to mow you down. Yes, people, if we don’t want the private sector to be in deficit and we can’t have the non-domestic sector in deficit than the only option is to have the public sector run a deficit. It’s a basic principle of accounting. It isn’t complicated.

It just isn’t what we have been taught. We have been taught to view the US budget as if it were separate of you and I, an independent entity which required internal balance. Instead, MMT proves that the public and private sectors are two of the three legs upon which this meta entity, the US economy, stands. So when you hear legislators scream about a deficit or you see a Tea Party protestor carrying a sign that says “Say NO to Socilism” on one side and “Don’t Mortage My Daugters’ Future” on the other side (after you get done laughing at the spelling) the response to this is simple – better you than me because you, meaning the US Treasury, can issue currency as you need it and I can’t.

So why are Italy and Greece in so much trouble with their deficits? That’s obvious. Neither country has control over its currency. Currency itself is, indeed, limited and has become, essentially, a commodity. In the overall European Union ecosystem, essentially, Germany has boomed at the cost of Greece and Italy. It’s that balancing thing again. Still, it’s easy to think of it this way. In the mid 1990’s, Italy had approximately X debt. They were not in crisis. They were a fully functioning economy and they paid their debts in Lira. Today, Italy also has X debt. Notice that this is the same amount. they are not any further in debt than they were but suddenly it is a debt crisis. Why? Well, it’s the Euro, of course. Italy is at the mercy of the Euro and there is no advantage to the Euro in favoring Italy so Italy is drowning under a bad debt they cannot pay with limited Euros.

What we want here in the US is what MMT theorists refer to as a good deficit. A good deficit is one which operates in an unconstrained way in terms of time and arbitrary limits. By contrast, fiscal austerity is deficit by design. Fiscal austerity directly impedes the growth of the private sector. New wealth is only created by the issuing monetary authority. Here, stand on this other train track while I explain this part. (Pay no attention to the giant locomotive that is moving in your direction.) I’ll return to the previous example.

Let’s say Schmoing sells that $85 wrench to Borthrop-Humman instead of the federal government. The value has passed from Borthrop-Humman to Schmoing but it remains in the private sector. It is not new wealth it’s just recycled. Even if Schmoing built the wrench from scratch, all the components were purchased from within the private sector and on the balance sheet the value still remains there. None of it is new.

BAM! *splat* *train wooshes by* Yeah, I know. I felt that way too. I always thought that because we built the thingie we were creating the wealth. My bad. I forgot that we may be building the thingie, the wrench in this case, but it has no monetary value. There is no money to pay for the wrench unless the issuing authority has issued said currency into the system and that can only be done by taking less out in taxes and/or pushing more in with government spending.

Professor Stephanie Kelton, Research Scholar at the Levy Economics Institute and one of the leading authorities on MMT has this to say,

So, let’s focus in on a specific period of time. The period in the late 1990s and early 2000s when for the first time in decades the US government ran budget surpluses…. Many people would inherently think that would be a good thing. It shows fiscal responsibility. Not only did they balance the budget, but they put it in surplus. Meanwhile, our current account deficits were huge. The rest of the world was running large positive balances against the US. That reduced US private-sector savings. Surpluses fell. It pushed the private sector into deficit on an unprecedented scale. The private sector went from surviving above the zero line to being pushed below zero. And the private sector remained there for a period of years, spending more than its income, borrowing to do it. And it was all fueled by a massive bubble economy that ended in recession, which drove the public sector’s balance back into deficit where it belongs.

When an economy is already in recession what it needs most desperately is new wealth and, with a fiat currency, that can only come from the issuing authority.

Inflation, Currency Exchange Rates and Unemployment

When was the last time your foot hat the flu? That’s because the flu is systemic. When one part of your body has it, your whole body has it. When an economy is in recession, it is systemic. Everything is effected. It is a meta problem. The odd thing about the US is that we have made choices to try to resolve our crisis without using the single most powerful weapon we have at our disposal. With any fiat currency there are only three things to watch for and none of them are deficit spending. The three economic delimiters are inflation, exchange rates and unemployment. As you can see, these things relate, directly, to each of the sectors.

In the past, deficit hawks and doves alike have tried to assail MMT theorists with the inflation argument. Just within the last three years some of the biggest names in economics, including some of the leading economic advisors to the US Department of Treasury and the Fed, have come to realize what MMT theorists have long known. If you are the issuer of the currency, you do not have to be at the mercy of bond vigilantes. As I said many paragraphs back, the US does not need to sell bonds or borrow currency in order to spend. These are habits and levers we employ as part of fiscal policy but they are not a necessity in terms of financing expenditures. It is interesting to know that the Secretary of the Treasury can order to be struck the currency of his choosing and deposit it in the federal accounts. Just like that. Congress would melt down in a fit of apoplexy, but it would be legal. The money gets injected into the economy and people go back to work. In fact, it would be easy and fast to open up the spigot and return the economy to “full” employment (approximately 3.7% unemployment) within the next two or three years at the most. An economy only gets inflationary, too hot, if new wealth continues to be pumped into the economy after the employment goal is achieved. Up until that time, provided there are no exigent commodity constraints, the supply remains in excess of the demand so inflation does not become a factor.

Again, from Professor Kelton,

Cash registers don’t discriminate. When you spend money in the economy there isn’t someone on the other end saying, ‘will that be public or private today?’ A dollar spent is a dollar spent. The federal government could SAFELY lower taxes, increase government spending, allow aggregate demand to increase.

Inflation is when demand outstrips supply. In the 1970’s this was because there was a sudden commodity shortage. The supply of oil was choked down to a trickle by the newly formed OPEC. Every product that used petrochemicals was effected. Trucks used to transport food needed expensive gas to get cheap lettuce transported across the country. The price of carrots went through the roof. Americans, with their huge gas-guzzling cars, waited in lines for gasoline. The economy could not take the shock. Unemployment rose at the same time prices spiked. Stag-flation was the new buzzword. This period is a classic example of what is called “demand-pull inflation.”

Money is not a commodity. It is not intrinsically limited. It is in no way comparable to oil (or gold). There is no reason that the US government should not be spending money to drive employment. The US dollar is not at risk of major devaluation and both short and long-term bond rates are at or just barely above zero. In other words, no one anywhere thinks the US economy is at risk of not being able to make its loan or bond payments. This is because all the investors, foreign and domestic, know that we are in full control of our currency. They are not at risk.

Final Thoughts

We have all become comfortable with viewing the federal budget just as we would view one small part of a much larger elephant. We each imagine that the “wall” or the “rope” that is in front of us is the whole thing. We each think it looks much like our personal budget only on a bigger scale. In fact, the meta whole is orders of magnitude larger and that entire pachyderm is sitting on a train that is, once again, headed right for you.

Over the next few weeks and months, the President and legislators from both Houses are going to be fighting over an imaginary “crisis” they have dubbed the fiscal cliff. This battle is entirely unnecessary. Our leadership is so used to thinking in terms of the gold standard that they still don’t know that a whole new age has dawned. The emphasis of MMT is in the power of the State to move within a substantially increased policy space which is largely unconstrained by monetary limitations.

For my part, I’ve told you about it. For your part, please pass this information on to your legislators and to anyone else you know. Post it on your Facebook page. Design a bumpersticker. Just don’t stay quiet.

I’ve digested quite a bit on MMT in recent weeks. I even read some of it before I ate it. A lot of what read really gets down into the weeds but some was quite accessible and can be found in the following places: